The Incremental Capital Output Ratio (ICOR) should be made public for all sectors, provinces, and cities. (In the photo: Metro Line 1 Ben Thanh - Suoi Tien is one of the city's public investment projects - Photo: TTD)
A report on several new and important issues in the draft documents submitted to the 14th Party Congress recently set the goal of maintaining the ICOR index at around 4.5 - meaning that 4.5 dong of investment capital is needed to generate 1 dong of additional GDP.
In an interview with Tuoi Tre newspaper, Professor Mac Quoc Anh , Director of the Institute of Economics and Business Development, shared more details about the nature of ICOR and solutions to improve this index for rapid and sustainable growth.
A measure of "being forgotten"?
* Sir, the Incremental Capital-Output Ratio (ICOR) is considered a "measure of capital efficiency," but it has rarely been mentioned in development reports lately?
- The ICOR (Incremental Capital Output Ratio) reflects the efficiency of investment capital – that is, how much capital is needed to generate one additional unit of GDP. This is a core indicator that helps policymakers assess the quality of growth, not just the growth rate. However, for many years, ICOR has been almost "forgotten" in local growth reports, mainly due to three reasons.
Firstly, the development mindset still prioritizes quantity over quality. Many localities still use "total registered investment capital," "project scale," and "total disbursed budget" as measures of success, while the efficiency of capital utilization is not closely monitored.
Secondly, there is a lack of a unified mechanism for measuring and publishing ICOR periodically. Currently, this index is mainly calculated at the national level by the General Statistics Office, while local or sectoral levels have limited complete data. Therefore, ICOR has not become a mandatory monitoring tool in the public and private investment process.
Thirdly, the investment system remains fragmented and lacks transparency. Without standardized project management practices and the application of digital technology in monitoring capital efficiency, accurately measuring ICOR is nearly impossible.
As a result, during the 2016-2020 period, Vietnam had an average ICOR of approximately 6.1, much higher than many ASEAN countries (Thailand around 4, Malaysia around 3.5). This means that we are having to spend more capital to achieve the same unit of growth - a sign that investment efficiency is not commensurate with the resources spent.
* The draft documents submitted to the 14th Party Congress set a target of maintaining an ICOR of around 4.5. In your opinion, is this level achievable?
- It's entirely feasible, but it requires a radical shift in mindset and investment methods.
To achieve this level, we need three prerequisites. First, increased labor productivity and investment quality. Currently, Vietnam's labor productivity is only about 60% of Thailand's and 45% of Malaysia's, according to ADB data for 2024. When productivity is low, the ICOR will always be high, because the same amount of capital has to "bear" more costs to produce the product.
Secondly, reduce scattered investments, especially in public investment. Thirdly, promote the digitalization of investment processes and apply project management technology, from the investment preparation phase to disbursement monitoring. When standardized and transparent data is available, the efficiency of capital utilization can be accurately measured.
Publicly disclosing the ICOR index enhances monitoring.
* In your opinion, is it necessary to publicly disclose the ICOR index for each industry and each locality?
- This should be done as a step forward in reforming budget transparency and public investment efficiency. I believe that publishing ICOR by sector or locality has three distinct positive impacts.
Firstly, it creates pressure for transparency and healthy competition among localities. When the ICOR is made public, localities that maintain low investment efficiency and generate more GDP from the same amount of capital will be recognized and attract more investment.
Secondly, it helps investors and private businesses have more data to make decisions, avoiding investing in inefficient areas or those with high capital costs.
Thirdly, it supports central agencies in monitoring the quality of public spending and private investment in a more efficient manner, avoiding waste of resources.
Of course, for this to be feasible, the ICOR calculation method must be standardized for each type of investment, avoiding unfair comparisons between infrastructure (large capital, long payback period) and services or technology (small capital, fast turnover). The Ministry of Finance could be tasked with leading and coordinating with the State Audit Office to establish a system for periodic publication.
* To achieve growth exceeding 10% per year during the 2026-2030 period and maximize investment efficiency, which industries or sectors should Vietnam focus its capital on?
- To achieve both rapid growth and a low ICOR, Vietnam needs to reposition its investment strategy towards four key areas.
Firstly, there's technology – innovation – AI and digital data. This sector has a high spillover effect, helping to boost the productivity of the entire economy. Investing one dollar in digital transformation can save three to four dollars in operating costs, according to estimates by the World Bank.
Secondly, there is the green economy and renewable energy. This not only brings economic value but also helps Vietnam comply with CBAM, ESG, and the Net Zero 2050 commitment, thereby expanding exports to the EU, US, and Japanese markets.
Thirdly, there is the logistics infrastructure and growth engine zones. Developing logistics belts and corridors linking the North, Central, and South, inland container depots (ICDs), and green supply chains helps reduce logistics costs (currently accounting for 16-18% of GDP, almost double that of Singapore).
Fourth is vocational education and applied science. This is the foundation of labor productivity – a factor that directly affects the ICOR. According to the International Labour Organization, Vietnam will face a shortage of more than 3 million workers with digital and green technology skills in the next five years.
Source: https://tuoitre.vn/can-minh-bach-chi-so-icor-20251103090155885.htm
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